Carbonomics 101: ‘Buyer beware’ – key risks associated with voluntary carbon credits and how to avoid them

Published: October 03, 2022

In the sixth article in this series, we take a closer look at key risks that companies should consider when using voluntary carbon credits to offset carbon emissions.

As the market for high-quality voluntary carbon credits continues to grow, companies may find themselves overwhelmed with choices around how to successfully deploy them as part of a wider climate transition plan.

In the last Carbonomics 101 article, we reviewed the three factors companies should consider when buying carbon credits. And earlier in the series, we stressed that understanding a carbon credit’s usage, credibility, and eventual retirement will be paramount to their successful use.

Here, we examine the projects underlying carbon credits. Most of the projects underpinning carbon credits that are certified to a high standard carry a low level of risk. However, some are subject to inherent and emerging risks that should be carefully considered. Companies that either plan to develop their own projects to underpin carbon credits or execute due diligence on credits they plan to buy, should aim to address these risks early on.

To that end, we’ve compiled a list of what we see as the top risks to be avoided.

Be wary of project-level risks

The long-term nature of projects underscores the need to thoroughly understand the risks connected to the projects that underpin credits. Some projects often span three to four years while others can stretch across three to four decades, and each project carries a nature-based risk that should be monitored.

Not all projects will be exposed to the risks below – each one will have its own unique attributes – but these are some of the most important ones to bear in mind:

Long-term risk management considerations and reporting provided by certified providers and auditors should be implemented in accordance and applicability with the relevant risks listed here.

Companies should ensure that project developers and voluntary carbon credit providers have a robust mechanism for assessing and managing risks, as well as measuring and reporting the impact at the project level to ensure credibility and effective SDG mapping towards the 2030 Agenda.

Apart from reducing greenwashing or SDG-washing risk, this can help contextualise companies’ unique climate transition journeys and communicate them to interested stakeholders.

Take the plunge, but with eyes wide open

In conclusion, the risks inherent to carbon credits may seem daunting, but with careful consideration and planning – and the help of a growing network of specialists – they can be navigated with relative ease. The urgency of the climate crisis means now is the time to seriously consider how to offset emissions that can’t be eliminated or reduced through other activities; carbon credits can play a pivotal role in that regard, but buyers should be aware of the risks before taking the plunge.